Tag Archives: Spousal IRA

If you are turning 70 1/2 this year, you may face a number of special tax issues. Not addressing these issues properly could result in significant penalties and filing hassles.

Traditional IRA Contributions

You cannot make a traditional IRA contribution in the year you reach the age of 70 1/2. Contributions made in the year you are turning 70 1/2 (and from then on) are treated as an excess contribution. These are subject to a nondeductible 6% excise tax penalty for every year in which the excess contribution remains in the account. The penalty, which cannot exceed the value of the IRA account, is calculated on the excess contributed and on any interest it may have earned.

You can avoid the penalty. How? By removing the excess and the interest earned on the excess from the IRA prior to April 15 of the subsequent year. Also, including the interest earned on the excess in your taxable income.

Even though you can no longer make contributions to a traditional IRA in the year you are turning 70 1/2, you can continue to make contributions to a Roth IRA. The contribution is not to exceed the annual IRA contribution limits. This is provided you still have earned income, such as wages or self-employment income, at least equal to the amount of the contribution.

If you are married to a non-working or low-earning spouse who has not yet reached age 70 1/2 and you have earned income, your earnings can still be used to qualify your spouse for a contribution to a spousal IRA. Even if you are turning 70 1/2 or older and can’t contribute to your traditional IRA, the spousal IRA would still qualify.

Required Minimum Distributions (RMDs)

Let’s face it, you have to start taking your deductions sometime. You must begin taking required minimum distributions from your qualified retirement plans and IRA accounts in the year you turn 70 1/2. The distribution for the year in which you turned 70 1/2 can be delayed to the subsequent year without penalty if the distribution is made by April 1 of the subsequent year. That means two distributions must be made in the subsequent year: the delayed distribution and the distribution for that year. In the following years, your annual RMD must be taken by December 31 of each year.

Still Working Exception

If you participate in a qualified employer plan, generally you need to start taking required minimum distributions (RMDs) by April 1 of the year following the year you turn 70 1/2. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the still working exception, your RBD is postponed to April 1 of the year following the year you retire.

Example: You are turning 70 1/2 in 2015, but you chose to continue working; you did not retire until June of 2017. Provided your employer’s plan includes the option, you can make the “still working election” and delay your RBD until no later than April 1, 2018.

Caution:This exception does not apply to an employee who owns more than 5% of the company. There is no “still working exception” for IRAs, Simple IRAs, or SEP IRAs.

Excess Accumulation Penalty

When you fail to take an required minimum deduction, you are subject to a draconian penalty called the excess accumulation penalty. This penalty is a 50% excise tax of the amount (RMD) that should have been distributed for the year.

Example: Your required minimum deduction for the year is $35,000. You only take $10,000. Your excess accumulation penalty for failing to take the full amount of the distribution for the year would be $12,500 (50% of $25,000).

The IRS will generally waive the penalty for non-willful failures to take your required minimum deduction, provided you have a valid excuse and the under-distribution is corrected.

Turning 70 1/2 Can Be Complicated

As you can see, turning 70 1/2 can complicate your tax situation. If you need assistance with any of the issues discussed here, or need assistance computing your required minimum distribution for the year, please give our office a call at 781-849-7200.

Maybe you know someone who can benefit from this information, feel free to share:

Spousal IRA is one frequently overlooked tax benefit. Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes: wages, tips, bonuses, professional fees, commissions, alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule. They allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as the spouse has adequate compensation.

The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse ($5,500 for years 2013 through 2015). If the non-working spouse is age 50 or older, the spouse can also make “catch-up” contributions (limited to $1,000 for 2013 through 2015). This raises the overall contribution limit to $6,500. These limits apply provided the couple together has compensation equal to or greater than their combined IRA contributions.

Example: Tony is employed and his W-2 for 2015 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limits for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $5,500 to an IRA for 2015.

The contributions for both spouses can be made either to a Traditional or Roth IRA. Or, it can be split between them. This is as long as the combined contributions do not exceed the annual contribution limit. Caution: The deductibility of the Traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income:

Traditional IRAs – There is no income limit restricting contributions to a Traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the non-participant spouse. This is only if the couple’s adjusted gross income (AGI) does not exceed $183,000 in 2015 (up from $181,000 in 2014). This limit is phased out in 2015 for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 2014).

Roth IRAs – Roth IRA contributions are never tax-deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $183,000 in 2015 (up from $181,000 in 2014). The contribution is ratably phased out for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 2014). Thus, no contribution is allowed to a Roth IRA once the AGI exceeds $193,000.

Example: Rosa, in the previous example, can designate her IRA contribution to be either a deductible Traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $183,000. Had the couple’s AGI been $188,000, Rosa’s allowable contribution to a deductible Traditional or Roth IRA would have been limited to $2,750 because of the phaseout. The other $2,750 could have been contributed to a nondeductible Traditional IRA.

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Disclaimer: This publication/blog, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Joseph J. Cahill / Worthtax or any of its subsidiaries or its attorneys, employees or associates representing Joseph J. Cahill / Worthtax. Additionally, the foregoing discussion does not constitute tax advice. Any discussion of tax matters contained in this publication/blog is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter.